Breaking

Apollo to Guggenheim Seek Annuity Windfall Insurers Missed

Jan. 29 (Bloomberg) -- Leon Black’s Apollo Global
Management LLC private-equity firm and asset manager Guggenheim
Partners LLC are betting they can make a windfall on annuities
as insurers scale back from the retirement products.

Black has called annuities and insurance a “hidden” asset
that can provide funds to invest and boost fees at his New York-based firm. Apollo and competitors may get more chances to add
such holdings because life insurers are seeking to cut risk tied
to obligations that weigh on profit when interest rates are low.

The annuity business is either “structurally busted, or
these are the deals of the century,” said Randy Binner, an
analyst at FBR Capital Markets. Buyers are wagering “they can
manage these assets more effectively with more aggressive
investment strategies and more aggressive tax strategies than
insurance companies can.”

Apollo’s Athene unit agreed to buy four insurers since
2008. That includes the $1.8 billion deal in December that
valued Aviva Plc’s U.S. life and annuity business at about 60
percent of statutory capital surplus, a measure of assets minus
liabilities used by regulators. The purchase will boost Athene’s
assets to more than $60 billion from about $13 billion.

The agreement with London-based Aviva, announced Dec. 21,
is the largest disclosed U.S. annuity deal since the 2008
financial crisis, according to data compiled by Bloomberg. The
second biggest was reached the same month, when a firm owned by
Guggenheim shareholders agreed to buy a variable-annuity unit
from Toronto-based Sun Life Financial Inc. for $1.35 billion.

‘Next Frontier’

“Private buyers see more value in life and annuity
businesses than does the public market,” said Sean Dargan, an
analyst at Macquarie Group Ltd., in a Jan. 16 note. “Variable
annuities are the next frontier.”

Annuities provide a steady source of income and can benefit
investors as they leave the workforce. There were 39.2 million
Americans aged 65 and older in 2011, compared with 32.6 million
in 2000, according to Census Bureau data. The U.S. Treasury
Department last year moved to make it easier to add annuities to
retirement plans

Fixed annuities offer a stream of payouts at a set rate. In
variable contracts, savers have the potential for higher returns
if stock markets gain, and can lock in minimum returns. The
guarantees burned insurers that failed to anticipate the risk
that equity markets and bond rates would fall.

More than $200 billion in variable-annuity account value
may be available for sale as companies like Manulife Financial
Corp., Hartford Financial Services Group Inc. and Genworth
Financial Inc. seek to cut risk from the products, FBR’s Binner
has estimated. Carriers had $2.8 trillion in reserves for
annuity contracts in 2011, according to data compiled by the
American Council of Life Insurers.

Meaningful Opportunities

Global firms may seek to divest U.S. insurance business to
help meet regulators’ new capital requirements, Goldman Sachs
Group Inc. said in a document this month for potential investors
in the bank’s Global Atlantic reinsurer. The unit, which backs
risks taken by insurers, may have “meaningful acquisition
opportunities,” according to the presentation. Michael DuVally,
a spokesman for Goldman Sachs, declined to comment.

Transfers may benefit sellers while pressuring the
creditworthiness of insurers being acquired by asset managers,
Moody’s Investors Service said in a note today.

‘More Aggressive’

Buyers “may adopt more aggressive risk, capital, and
investment management strategies,” Moody’s analysts led by
Weigang Bo said. Asset managers “are more likely motivated by
financial rather than strategic considerations, often focused on
an intermediate-term exit, and may seek to extract dividends
from the life insurer.”

U.S. annuity sales to policyholders fell to $240 billion in
2011 from $265 billion in 2008 as life insurers cut benefits
after interest rates fell and liabilities climbed on the
products, according to industry group Limra. Annuity providers
add to profits when they earn a higher rate investing funds than
what they credit to policyholders.

“We have a long track record of managing and running that
type of business through all different economic cycles and
interest-rate scenarios,” James Belardi, Athene’s CEO, said in
an interview.

Athene is among Apollo’s “hidden assets,” Black, 61, said
at a conference in December, before the Aviva deal was
announced. About a third of Athene’s cash can be invested in
Apollo funds, helping boost fees, said Black, the former head of
mergers and acquisitions at Michael Milken’s Drexel Burnham
Lambert Inc.

European Debt

Athene has invested in Apollo leveraged commercial
mortgage-backed-securities vehicles, a life settlements fund,
and a European senior debt fund, according to a filing that
Apollo Capital Management LP made with the U.S. Securities and
Exchange Commission on Jan. 7.

Charles Zehren, a spokesman for Apollo, declined to
comment, as did Genworth’s Julie Westermann. A spokeswoman for
Toronto-based Manulife didn’t return a message.

Hartford had $77.7 billion in U.S. annuity customer account
balances as of Sept. 30. The insurer took a $3.4 billion U.S.
bailout in 2009 after liabilities on the contracts swelled. CEO
Liam McGee, who took over that year and repaid the rescue, said
he is “laser focused” on cutting variable-annuity risks.

Cutting Risk

The Guggenheim-Sun Life deal is the first involving
variable annuities since the financial crisis, according to
Goldman Sachs analysts.

The transaction values the U.S. business of Canada’s third-largest insurer at 1.2 times a measure of book value used by
regulators, Toronto-based Sun Life said in a presentation.
Assets under management in the U.S. annuities business were
$37.8 billion as of Sept. 30.

Aviva had said it was eager to scale back in the U.S. to
reduce volatility and avoid higher capital requirements. The
U.S. unit has more than 930,000 clients for products including
life insurance and annuities.

“We’re working on taking the risk down and building the
capital up,” Aviva Chairman John McFarlane said on a call with
analysts in November.

Philip Falcone’s publicly traded Harbinger Group Inc.
bought Fidelity & Guaranty, the U.S. life and annuity unit of
London-based Old Mutual Plc, for $350 million in 2011. The deal
valued the business at about 39 percent of book value according
to a statement at the time, as the seller worked to cut debt.

‘Heavy Discounts’

“We love to do great deals that are heavy discounts, and
those are few and far between,” Gus Cheliotis, vice president
and investment counsel at Harbinger Group, said in an October
presentation in Chicago. Deals that meet the firm’s return-on-equity targets often involve a distressed seller, he said.

Falcone’s Harbinger Capital Partners LLC hedge fund has
struggled amid lawsuits from the SEC and an investment in a
wireless-communication firm that later declared bankruptcy. It
managed less than $5 billion at the end of 2011, down from a
peak of $26 billion in mid-2008.

MetLife Inc., the largest U.S. life insurer, has said it
plans to cut variable-annuity sales for a second year in 2013.

“The riskier your overall portfolio is perceived or is,
either one, whether it is or perceived, it still goes through to
your stock price,” MetLife CEO Steven Kandarian told investors
in May.